June 20, 2019 / 4:30 PM / 8 months ago

SEC says closed-end funds should disclose more, managers differ on requirements

NEW YORK, June 20 (LPC) - Firms that manage closed-end funds agree that regulatory proposals that would force managers to disclose more information to investors including factors affecting performance as well as investment strategies could be beneficial, but disagree on whether regulators should dictate what specific data is shared.

As part of the Securities and Exchange Commission’s (SEC) “Securities offering reform for closed-end investment companies,” the regulator is proposing to modify the registration, communication and offering process for business development companies (BDCs) and closed-end funds.

In comment letters sent this month to the SEC, asset manager Nuveen argued that it would be appropriate to extend more in-depth disclosure requirements to closed-end funds, as did investment firm Invesco and the Investment Company Institute (ICI), a global association of mutual funds and exchange-traded funds (ETFs). But the latter two both said the regulator should not determine the specific information included in the disclosures.

The SEC recommendation, released in March, has been viewed as a positive for investors in closed-end funds that were not required to receive the same information holders of similar investments such as open-end mutual funds and ETFs received. But, while a boon for holders of the fund, the process may be costly and time-consuming, at least initially, for some managers as they gather the required information.

As part of the proposal, the SEC recommends a management’s discussion of fund performance, known as an MDFP, now be required for all registered closed-end funds. The MDFP would evaluate factors materially affecting the fund’s performance and include a discussion of market conditions and the fund’s investment strategies.

Market participants were allowed to send the SEC comments on the proposal by early June. An SEC spokesperson did not return an email seeking comment on the letters.

“We support the proposed requirement for closed-end funds to include MDFPs and related graphical presentations in their periodic reports,” Susan Olson, general counsel at the ICI, wrote in a June 10 letter. “MDFP information can assist investors with understanding fund performance and market conditions over the reporting period from the fund manager’s perspective.”

Teachers Insurance and Annuity Association of America (TIAA), through Nuveen, its investment management arm, also wrote that the proposal to extend MDFP disclosure to all closed-end funds should resemble the requirements currently in place for mutual funds and ETFs, Gifford Zimmerman, associate general counsel at the firm, wrote in a June 13 letter to regulators.

“We further believe that it would be appropriate for any changes made now or in the future to the MDFP disclosure requirements for mutual funds and ETFs, including revisions regarding the use of benchmark indexes, to be applied in parallel to the MDFP disclosure requirements for” closed-end funds, Zimmerman wrote.


But both ICI and Invesco argued that the SEC should not dictate the specific information included in an MDFP, rather asset managers should have the flexibility to discuss factors they think are most important to fund performance.

“Due to the unique features of (closed-end funds), flexibility should be allowed for these funds to craft MDFP disclosure that would be most relevant for a particular (closed-end fund) and therefore most useful to its shareholders when evaluating a (closed-end fund’s) performance,” Jeffrey Kupor, head of legal, Americas at Invesco, wrote in a June 10 letter.

But Invesco said it agrees investors can benefit from annual reports that offer a more in-depth narrative description of a fund’s performance. The firm’s current practice is to rely on shareholder reports to describe key changes to a fund and already provides an MDFP section in all of its closed-end fund annual reports.

Spokespeople for respondents either declined to comment or did not respond to a request for comment.

While some firms disagreed on what information the SEC should require to be included in investor disclosures, most agreed that more information is beneficial for investors.

“These proposed amendments should make communication simpler and less expensive for issuers, (and) make more information available to their shareholders,” David Smith, general counsel for the Mutual Fund Directors Forum, wrote in a June 12 letter.

“Our belief is you want full and fair disclosure, but you want it cost effectively and efficiently as possible,” Smith said in a telephone interview. “Broadly speaking, what the SEC is doing is directionally correct and we are very supportive of it.” (Reporting by Kristen Haunss. Editing by Michelle Sierra and Jon Methven)

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